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Lifting of Corporate Veil?

In the paper below we will be discussing why the lifting of corporate veil should be abolished and how the concept is preferred by the courts and is deeply challenged by the lawyers considering that the topic of piercing of the veil in itself is debatable as it lacks in the precedents available that could be referred, it is hurting the limited liability principle, decisions are based on the obiter of the judges and even the rule is evolving overtime which is creating a room for further appeals.

Delays in the process which are causing inconvenience and because of these uncertainties small businesses are also suffering as they rather than externalizing the risks are internalizing the risks more so as to be on a safer side. At the time of incorporation due diligence is paid to avoid the unpredictable circumstances raises substantial cost and is causing a drawback for small corporations as efficiency and equity is what is looked upon by judges at the time when the veil is pierced and it is ignored that these corporation have a duty towards society at large and is causing a loss to the economy.

In the case of Salomon vs Salomon1, it is stated that the company has a separate legal entity & is an artificial legal person that can sue and can be sued in its own name. As per the companies act 2013 a company has a common seal & is registered with its own name company composed of the shareholders and its members whereby liability of these shareholders can be limited or unlimited depending upon the mode of incorporation of the company.

A liability is called as limited when in case of the debts or when company goes into liquidation then in this case the limited liability protects the shareholder's assets to be attached with the company's assets for the repayment of such debts to the creditors. Here, we will be discussing about the limited liability of the shareholders and the concept of the corporate veil linked with the separate legal entity concept because even though the company maybe a separate legal person but it is still an artificial person and at the back the members of the company are the one's running this so, there are the possibilities that these separate functions are used for the its own benefit than the benefit for the corporation.

Example: As we often watch puppet show there exists a person who is running the puppets through the threads & everyone claps & praise for the puppets till everything is running fine but when that person running the puppets goes beyond his limits and start using a foul language against the person sitting in the audience for his own personal gains then in such case Audience will hold the person running the puppets liable and not the puppets for the fault committed by the person.

So, this is what happens with the company as a company can be considered as a puppet and the one's running the puppets are the shareholders of the company and there exists an invisible veil between the company and its members in order to protect the distinct identity of the company this veil can be lifted or pierced. But this whole concept of veil piercing is widely challenged because of the uncertainty and an undefined set of precedents, lets understand it with the help of the evolving scenarios which shows that how the unwritten format is causing delays and the decisions are made at the obiter of the judge than any predefined format adopted in the decision making.

Conditions For Lifting Of The Corporate Veil

Earlier a condition that was proposed for the veil to be lifted was that if in certain circumstances the shell company is formed which could involve a third-party interest to defraud the creditors or to avoid the payment of taxes, revenue as happened in the case of maneckji petit case2 as well as the case of workmen vs associated Tyre co.

For non-payment of welfare of workmen such as bonus. in these cases veil piercing was done to protect the interest of the creditors and the veil can be pierced by either the court of through the companies act 2013, While forming the principles for lifting of the corporate veil it is necessary that common law principles are taken care of even though the common law principles uphold the validity of separate legal entity but in certain circumstances it is possible that the veil may get lifted but these circumstances are not mentioned anywhere particularly.

There are broadly two principles on the basis of which we will be considering on which the veil is getting pierced:
  1. The principle of Evasion
  2. The principle of concealment,

The evasion principle is development of the earlier stages which says that when the rights are frustrated in the name of separate legal entity through a shell company this was used to make good of the situation and the concealment principle evolved later to find out the real actors behind the whole concept who can benefit out of the provisions we will understand this.

Further through the developments that are happening and how this doctrine is evolving in the times and still is unclear and how these principles of both evasion and concealment were actually not much needed because of the already existing provisions of law3.

An evasion principle was adopted where separate legal rights were frustrated by the owner towards the third party and this could be prevented by the veil piercing process holding the shareholder liable if he is using the structure of separate identity for his own purpose and in these cases the rights of the shareholders in itself.

Becomes frustrated if they start to misuse the provisions in the name of company as a director has a fiduciary duty toward the corporation to act in a good faith and for the benefit of the corporation and not of himself and this was the accepted principle but the concept of veil piercing kept on widening itself and a new principle was introduced which is showing how when the base is not traceable then it becomes hard to catch upon the real fault which is tried to be nullified.

With the help of evolving principles and in the same way Later when a matrimonial case arose (Prest)4 veil was lifted but the case here was not related to a shell company, the veil was pierced holding the questions about the separate legal entity into questions and the scope was widened and the new principle of concealment was defined in order to make sure that appropriate relief is granted to the person & hiding of facts can be bought forward in decoding the real actors behind the curtain5.

Insufficiency Of The Principles & Obiter Of The Judciary

So, these two principles of Evasion and Concealment are not sufficient to save the veil piercing because it can be said that it is not necessarily require to pierce the veil the judges already had the principle and laws governing such situation whereby with the provisions of law and his power judge can still unveil the real actors hidden behind and performing the tasks which are against their duty.

And their identity is kept hidden so as to gain monetary benefits the judge does not need to have a veil piercing to keep a check on this when there are provisions in law so the concept of concealment principle is widening the matter because here the shareholder- principal relation was pierced and the assets were required to be distributed even when those were of the company and when it comes to evasion principle and Under s 49 of the Insolvency and Bankruptcy code 2016 6

As per Aron Saloman case it was evident that even though that most of the shares are in the hands of the Aron still at the time of liquidation he was treated as separate from his company and the company is neither agent nor a trustee for any of its corporators and the case emphasized on the separate personhood from the company. But when we look at the case of Daimler & co. Ltd 7.

It was seen that the continental company was English by origin but all the shareholders were German except one but the incorporation of the company was in England and it was an English company so the issue arose for the non-payment of dues by the Daimler co.

To the continental co. and later when the veil was pierced it was stated that when all the directors of the company are German and there is a war between two countries in this case if Daimler and company makes the payment it will be termed as dealing with the enemy character during the war which they can use it against the England only which is prohibited as per common law to deal with enemy countries at the time of war which could affect as a threat to the country itself.

So, the point here is that the payment is to be made to the corporation and is for the benefit of the corporation not the corporators thereby the profit is for the corporation and a company is neither the agent of nor the trustee for any of its corporators and the payments will be the asset of the corporations so it indirectly linked that if the corporators are gone.

Then this might turn out to be the ground for winding off but in the above case it was not necessarily required to pierce the veil and even the principal of law prevent such type of things from happening as the law prohibits the formation of such companies which are formed to carry unlawful activities and when we bring the concept of Saloman case.

And the separate identity it can be seen that the separate identity is kept as an exception here and the veil was pierced just on the basis that the company poses a threat to the country and dealing with the enemies during the war does not permit the Daimler to pay to the continental company as it will be like dealing with enemies but the piercing so done is affecting the sole basis of the separate legal entity and in this way the corporations will suffer and there will be a risk vested in them when they will continue to deal in the transactions.

Because the basis on which the veil was lifted pointing of the German nationality but the matter of fact is avoided that the incorporation was in England in such ways all such corporations may suffer economic as well as financial losses because at the initial time only the cost will be required to be spent on the lawyers for paying due diligence from the initial time of the incorporation of the company because veil is matching at par with the situations where the obiter of the judge8 is matching with the favorable situation of the country and in these principles of efficiency and equity it is ignored that the corporation is having social responsibilities and this might harm the economic situations.

Limited Liability And Seperate Legal Entity

Considering the case of Walkovszky v. Carlton 9 here Carlton formed ten cab companies to save the taxes and revenue and when Walkovszky was hurt by one of such cab and claimed against the company he could only sue one company but there were provisions that if he could have sued the Carlton.

On the individual identity basis then there may be some possibilities for the better claim amount and formation of a larger case but eventually in this case judges held that clarton cannot commit fraud and dividing the interest into multiple corporation structure is not wrong and company cannot commit fraud by just expanding itself. But here when we apply the doctrine of alter ego it was all in all visible that the veil could have been lifted and was eligible to be lifted on the facts of the case itself that the formation.

Of such other companies by keeping a minimum value in each of them so as to prevent risks and revenue saving technique the shareholder was committing a tort by dong this and also As per the vicarious liability when a tort is committed in such cases an agent and principal relationship will be treated so the corporation is treated as an agent of the shareholder-principal concept and liability can be imposed on the shareholder.

Whereas in the case of Dinshaw Maneekjee10 it was evident that the judges declared that the company and the assessee are same and the company was formed to avoid the super tax, gain interest and the veil was lifted when the scenario is almost similar in both the above cases but the decisions are varying because the scope of the case is larger as what it looks like on the face of it and in the case of Walkovszky the judges themselves suggested remedies and a space for further appeal was created.

So, above scenario is showing how obiter dicta is prevailing and things are running at per the discretion of the judges and even judges are less confident while handling the cases that involves piercing as compared to the cases that are more straightforward having appropriate mechanism & treatment and because of the lack of this availability judges mostly allow more appeal in the cases of veil piercing which is causing unnecessary delays in the process involving longer litigation process which may further raise the cost of carrying disputes and inconsistency in the normal process.

Hurdles For Small Corporations

The lifting of veil is harming the principle of limited liability as we can see that the liability of the shareholders are limited and when the veil is lifted then they may be required to attach the personal assets also for the settlements of claims and because of this small enterprises suffer rather than externalizing the risks they tend to internalize risks and in order to remove the scope of uncertainty they are made to appoint lawyers.

And invest cost in that and lawyers are also required to pay due diligence in the times of the formation of the corporation and all these unpredictable circumstances raises the cost which is becoming a disadvantage for small businesses because it can be seen that there are not certain specified outlines and graphs of the content of the legal rule on which the veil is pierced raises the substantial cost so in order to avoid such problems small business internalize the funds rather than expansion their sources.

Because judges look upon efficiency and equity when they look at the time of the piercing of the veil so in case of small business a larger cost is involved and adopting new measures can turn out to be risky and this is affecting the society at large because there are social responsibilities of the person which is often ignored and the businesses are suffering and causing a drawback for the small corporations.

Conclusion
It can be concluded that the basis on which lifting of veil is done should be made clear as certainly things are left at the obiter of the judges, it is questioning the long accepted principle of limited liability evidentially it can be seen that when the veil is pierced it can lead the shareholder in the position where he is required to attach his assets as a compensation.

And the separate legal entity of the company is also ignored and this unpredictability is hampering the growth because the small corporations are hardly willing to externalize the risks they are more towards internalization of the risk because while making the decisions judges often look upon efficiency and equity principles whereas social and economic factors are ignored.

And, the two principles e.g.: evasion and concealment are not in themselves complete and it can also be remarked that due to the existing provisions available in the law these new principle in lifting the veil were not necessary and if they are required then must be kept only for the rare circumstances where the piercing of the veil is really required because of lack of precedents available a judgment is laid down leading to the problems where varying decisions are being passed and evolving every time.

End-Notes:
  1. Salomon v A Salomon & Co Ltd [1896] UKHL
  2. Daimler Co. Ltd v. Continental Tyre & Rubber Co. Ltd. (1916) 2 AC307
  3. Sir Dinshaw Maneekjee Petit AIR 1927 BOM 371
  4. Prest v. Petrodel Resources Limited AIR 2013 UKSC 34
  5. Sir Dinshaw Maneckjee Petit AIR 1927 BOM 371
  6. "Veil piercing": an unnecessary doctrine AIR 2019 5 JIBFL 317 | LexisNexis
  7. Why piercing the veil should be the last resort Dorota Galeza I.C.C.L.R. 2020, 31(5), 296-303
  8. Gilford Motor Co v Horne [1933] Ch. 935; Jones v Lipman [1962] 1 WLR 832
  9. Petrodel Resources Ltd v Prest [2013] UKSC 34; [2013] 2 A.C. 415.
  10. International Company and Commercial Law Review 2020 | Why piercing the veil should be the last resort by Dorota Galeza

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